http://www.washingtonpost.com/wp-dyn/articles/A46486-2005Apr12.html Fifteen NYSE Traders Indicted Investors Were Cheated, U.S. Says By Carrie Johnson Washington Post Staff Writer Wednesday, April 13, 2005; Page A01 Fifteen current and former traders at the New York Stock Exchange were criminally charged yesterday with cheating investors out of the best prices for their stock trades in what could be unparalleled abuse of their position at the world's largest and most prestigious stock market. The exchange also faces disciplinary action for failing to adequately police its sprawling floor, where 1,366 traders handle an average of 1.6 billion shares a day. The traders are accused of getting in between orders to buy and sell, taking for themselves the best prices and depriving investors who ordered the trades of at least $32.5 million. "These defendants broke the rules repeatedly, they cheated the markets, and they cheated the investors who relied upon them," said Manhattan U.S. Attorney David N. Kelley. The indictments are the result of a two-year investigation into one of the widest-ranging manipulations ever of trading at the exchange, known as the Big Board, and they follow a series of ethical breaches in recent years that have tarnished the exchange's image as the most transparent and fair market in the world. The stocks at issue in the improper trading include some of the nation's biggest companies, including Bank One Corp., Eli Lilly and Co., Hewlett-Packard Co., Merrill Lynch & Co., Pfizer Inc., Time Warner Inc. and the Walt Disney Co., according to court papers. The charges come at a time when investor confidence already has been eroded by years of accounting scandals and revelations of illegal mutual fund trading. The abuses operated within the heart of a system that was designed to protect the interests of investors and to ensure they receive the best price for their trades. At the same time the indictments were announced, the Securities and Exchange Commission filed separate civil charges against the 15 traders and five others. The traders "showed a disregard for their legal duty that was both profound and at times, profane," said Mark K. Schonfeld, director of the SEC's Northeast regional office. In some cases, these traders, known as specialists, made statements explicitly denigrating investor orders placed through the exchange's electronic trading system, known as the designated order turnaround system, or DOT. Unnamed specialists said, "Screw the DOTs," according to an SEC news release. Most purchases and sales of securities on the NYSE go through a system in which specialists are assigned to monitor particular stocks. They are obliged to match customer orders with each other whenever possible and ensure that the trading system works smoothly to find the best prices for buyers and sellers, experts said. Trades in the stocks may be made only through the specialists, which is why their role is so critical. Traders were accused yesterday of buying or selling stock for their own accounts at prices that were better than those they gave to existing public orders. That practice is known as "trading ahead," regulators said. Fifteen NYSE Traders Indicted The specialists also were accused of using a trick in which they bought a customer "sell" order and then sold at a higher price into an opposite "buy" order from another customer, pocketing the difference. Such moves helped the traders lock in guaranteed profit at the expense of their customers. The fraudulent practices enriched the specialist firms and resulted in higher salaries and bonuses for people who took part in the manipulation, U.S. Attorney Kelley said. The SEC settled civil charges against the NYSE for failing to police and discipline the errant specialists. The exchange, which did not admit or deny wrongdoing, agreed to spend $20 million to beef up regulatory audits by hiring an independent reviewer. The exchange also said it would start an 18-month pilot program to provide video and audio surveillance of activity related to at least 20 stocks on the trading floor. The SEC criticized the exchange's monitoring system, saying it was set up to uncover "only the most egregious instances of trading violations." Richard G. Ketchum, the exchange's chief regulatory officer, said the NYSE has strengthened its enforcement unit and installed new technology to prevent improper trading since the investigation began in 2003. The regulatory unit now reports directly to the board of directors, rather than the NYSE chief executive, to help insulate it from pressure from traders and member firms. "Specialist firms have changed, as have we," Ketchum said in a news release. "It's highly unusual and somewhat shocking to see criminal activity on the floor of the New York Stock Exchange," said Jacob H. Zamansky, a securities lawyer who represents individuals suing Wall Street firms. "It also highlights that the NYSE seems incapable of supervising [traders]. It's a big setback for investor confidence." U.S. Attorney Kelley pointed out that 14 of the people indicted yesterday at some point served as supervisors or managers at their respective firms -- Fleet Specialist Inc., now Banc of America Specialist Inc.; Bear Wagner Specialists LLC; LaBranche & Co.; Spear, Leeds & Kellogg Specialists LLC; and Van der Moolen Specialists USA. Most of the defendants, except for one authorities say is at large in the Netherlands, surrendered yesterday morning and were scheduled to appear in court for arraignments. These firms and two others, SIG Specialists Inc. and Performance Specialist Group LLC , agreed to pay $247 million to settle related civil charges last year. Indicted were David A. Finnerty, Donald R. Foley II, Scott G. Hunt and Thomas J. Murphy Jr. of Fleet; Frank A. Delaney IV and Kevin M. Fee of Bear Wagner; Freddy DeBoer of LaBranche; Robert A. Johnson Jr. at Spear, Leeds; and Patrick J. McGagh Jr., Joseph Bongiorno, Michael J. Hayward, Richard P. Volpe, Michael F. Stern, Gerard T. Hayes and Robert A. Scavone of Van der Moolen. A defense lawyer for Finnerty, Frederick P. Hafetz, said that his client pleaded not guilty and that Finnerty "did nothing wrong." Other defense lawyers did not return calls or could not be reached for comment. Columbia University law professor John C. Coffee Jr. said the criminal charges against specialists based on fundamental trading practices are unprecedented -- and a direct result of increased scrutiny by law enforcement authorities across the financial services industry. "What prosecutors are recognizing is that across the financial field, the one weapon that seems to work, frightening as it is, is the criminal sanction," Coffee said. The NYSE previously settled civil charges related to inadequate policing of independent floor brokers in 1999. Eight brokers connected to Oakford Corp. faced criminal charges for setting up secret accounts using phony documentation and illegally profiting from them in the late 1990s. The investigation by federal prosecutors continues, according to spokeswoman Megan L. Gaffney. Securities regulators also continue to probe the actions of individuals "who may have fallen down on the job and contributed to the failure that resulted in the case we bring today," SEC enforcement chief Stephen M. Cutler said.
Cliff, Here is the link your looking for http://www.nyse.com/regulation/construles/1098814933907.html
Thanks Joe: Here is the link from the original thread http://www.elitetrader.com/vb/showt...rpage=6&highlight=cheap bastards&pagenumber=2 Just in case. Steve
I use stops on NYSE stocks consistently on positions that I am manually trading. In my experience of trading listed for many years the time priority of having the stop sitting there is worth more in reduced slippage than the few times my stop has probably been picked off. For my automated systems I do not put the stop on the floor but let the program exit with a limit well through the quote when the stop would have been hit if it had been on the specialist's book. As far as stops on the AMEX... I won't trade the AMEX equities because of the sloppy handling of practically every order that I have ever placed with those people. I do trade some of the ETF's but use ECN's for execution, never through the floor.
Some people, who know what they are doing, like Don Bright, have developed strategies and techniques for working NYSE so as to make profits. If you are very careful and mindful of the pitfalls of trading against criminal specialists, then you too might learn to make these strategies profitable. My criticisms of NYSE and AMEX should not be taken to deny the profitability of people like Don Bright and his successful students. But I am quite sure that it is a big mistake to assume that specialists are going to obey exchange rules. If somebody who really knew the ins and outs of trading NYSE, like Don Bright, told me that it was safe to leave stops on NYSE, then he might very well change my opinion. I don't consider myself an expert on NYSE trading. Consider my opinions to be a warning to proceed with extreme caution, until and unless you get better advice from somebody more knowledgeable than me. Don't take advice from somebody who denies the culture of criminality at NYSE/AMEX. I doubt there are any serious, experienced traders who profit on the AMEX. AMEX trading is so corrupt, much more so than NYSE, that the AMEX is just a joke. People in the know call it "the SCAMEX".
I don't need to get into an arguement defending a bunch of pigs that will be convicted. The rules are there however, and frankly, not many large stop orders are on the books so it would really not be worth fooling around with. You might as well go where the money is. Also, as far as I remember, anytime a specialist participated in the buy or sell of a stop order you had to fill out a special form, so there was concern these were being watched. Often, i would execute orders in a manner in which I would not have to fill out the form. Part of the reason Don's system works is because it is uniquely adapted to the NYSE. would good would his envelopes be if there were no price improvement oppurtunity? As a longtime trader in both markets my two areas of concern and perhaps it will be a different thread but 1. The NASDAQ needs one unified opening, what happens now is a disgrace and unfair to all except those handling the orders 2. I don't have much interest in the NYSE version of price improvement when I enter an order. I know where the stock is trading, the bid and offer, and I act accordingly. I want speed. However, for orders left on the book the are providing liquidity, they should get price improvement. I get that at the NYSE and it is a money maker in some less active issues.
The fact that the NYSE and AMEX are self-regulated is irrelevant if their folks don't respect the rules and are indicted on fraude charges every other year. I am sure there are honest specialists too but in the list of rules you mention don't forget there is one that says that the specialist has an interest in the trade. cstu, Just curious, what did you do on the floor for 15 years?
Specialist clerk then a specialist. You are correct self-regulatory does stink and is no basis for thinking the order will be handled correctly. However... if someone wants to get into a debate on the relative merits of stop orders it would help if we knew particulars. If we are sitting talking about 100 share orders we arbeing a little ridiculous. Was not worth the time.
I think we are seeing some of the typical weak arguments coming to us from boosters of the NYSE/AMEX. One of these is that you don't need to worry about the specialist screwing you out of a small amount of money, because it just isn't worth it. Investigations have shown that the specialists actually do make enourmous amounts of money by screwing people out of very small amounts, over and over and over again. You need to worry about any strategy involving the NYSE, until you establish, either by trial and error, or by advice from somebody who really knows better, that your particular strategy will be safe from the criminals. The idea that you can rely on the rule requiring specialists to file a form, when they run stops, might be true, but I would regard it with suspicion. NYSE rules are made to be broken, and NYSE enforcement is systematically flawed and designed to help the rulebreakers. What is to stop the specialists from getting around the rule by avoiding the other side of a stop order, and by instead allowing one of his floor trader buddies to take the other side of your stop, and then split the resulting profits with the specialist in a separate transaction? Perhaps we will be assured there is another rule to address this problem, blah blah blah, but I say, assume the worst until you have solid information to the contrary. Another NYSE scam is that of "price improvement". This is sort of like Al Capone pretending to be a good guy, because he takes a portion of his proceeds from crime, and uses it fund soup kitchens for the poor. It is so easy to give away money that you stole from other people. Price improvement is the idea that the NYSE will unexpectedly give you free money, by way of a price better than that quoted, and that this should be an incentive to trade at NYSE. The truth is that price improvement will be outweighed by the money stolen from you on other NYSE trades. Price improvement operates like a slot machine. If you keep playing the slot machine, the odds guarantee that you will lose, but you do get occasional payoffs from a slot machine, which are designed to manipulate your irrational mind into continuing to play until you lose everything. The only people who can truly benefit from price improvement are those who have developed the special ability to work the NYSE to their advantage, people like Don Bright, and these people are a very small minority.